Canadians should ‘buy smaller’ homes in response to interest hike, Bank of Canada head says

As the Bank of Canada raised key interest rates to 1.5 per cent (up from 1.25 per cent) Wednesday morning, mortgage rates are already rising as well.

RBC has raised its prime lending rate by 0.25 per cent as well.

Along with the new mortgage lending rules implemented in 2018, that makes home ownership just a little more out of reach for some Canadians.

READ MORE: New mortgage rules could shut out 10% of low-ratio homebuyers: Bank of Canada

But don’t worry, the governor of the Bank of Canada has a solution for you: choose a “smaller and less expensive home.”

“As we said at the time, many of these issues go down to the individual level: people who don’t qualify for a mortgage on the house they wish today have multiple avenues of adjustment, one of them being to just go ahead and buy a smaller and less expensive home,”  Stephen Poloz said, while announcing the rate hike.

WATCH: A look back on past interest rates in Canada

0:59 A look back on past interest rates in Canada

House prices have fallen slightly in recent months thanks to new foreign buyer rules in certain provinces.

In May, the average home price according to the Canadian Real Estate Association was $496,084, down 6.4 per cent from May 2017.

In Toronto and Vancouver, the price jumps to $772,000 and $1.1 million respectively.

A separate Royal LePage report breaks down the price by type of home: the national median price in the second quarter of a two-storey home rose 0.8 per cent year-over-year to $720,504, while the median price of a bungalow climbed 1.8 per cent to $512,979. The price of condominiums rose 8.1 per cent year-over-year to $435,421.

WATCH: Money 123: Is Canada entering an era of flat home prices?

2:11 Money 123: Is Canada entering an era of flat home prices?

“That seems like an odd thing (to say),” Dr. Penny Gurstein, director of the School of Community and Regional Planning at the University of British Columbia, told Global News.

While the “buy smaller” method could work in smaller markets, it doesn’t work in urban environments where the market is already unaffordable, experts explained.

According to a Royal Lepage study, in Vancouver the average home priced at around $400,000 only has 1.5 bedrooms, compared to the national average of 2.7 bedrooms.

Mei Lan Fang, a research associate at Simon Fraser University and social scientist with MTEK, called the statement “brash and rather insulting.”

“This statement doesn’t take into account the social implications, one being that we’re talking about a basic necessity and not a matter of purchasing a smaller 49-inch screen vs a 60-inch flat screen for your living room,” Fang told Global News.

She also said that it’s a different situation for families, where purchasing a smaller home could limit the amount of children per household.

“For young Canadians who grew up here, there is little opportunity to ever own a home in Vancouver, unless it is inherited through family. For older people who don’t own their own homes, they are very much at risk of being homeless and for older people who do, many are forced to sell and downgrade because they are not able to afford the upkeep,” she said.